Residential Re 2013 grows to $300m, price guidance drops

U.S. primary insurer and military focused mutual insurer USAA has become the latest cat bond sponsor to see its new transaction increase in size and pricing expectations for the deal drop due to demand from investors. Residential Reinsurance 2013 Ltd. (Series 2013-1) is the 20th cat bond USAA has sponsored under the Residential Re banner and sees it looking for more multi-peril reinsurance protection from capital markets investors.
With this Series 2013-1 issuance by Residential Re 2013 sponsor USAA is seeking a source of fully-collateralized reinsurance protection, both per-occurrence and aggregate protection, using an indemnity trigger. The deal covers USAA for personal-lines losses over a four-year risk period for the perils of U.S. hurricane, U.S. earthquake, U.S. severe thunderstorm, U.S. winter storm and California wildfire within a defined covered area.

The transaction, which is split into two tranches, began marketing with a preliminary size of $250m and is split into two tranches of notes, a per-occurrence tranche of Class 3 notes sized at $95m and an annual aggregate tranche of Class 11 notes sized at $155m.

Now, we understand that the Class 3 tranche of notes has remained the same size at $95m but the Class 11 tranche has grown in size by $50m to now offer $205m of notes. That’s a 32% increase in size for the Class 1 notes and a 20% increase in size for the transaction as a whole.

The expected risk spread on both tranches of notes has dropped to below the bottom end of the original price guidance. The Class 3 notes began marketing with a coupon range of 9.75% to 10.5% but are now being offered with a range of 9.25% to 9.75%. The Class 11 notes have experienced a similar drop in pricing, reducing from the original range of 8.5% to 9.5% to now offer a spread range of 8% to 8.5%.

We understand that the deal is due to receive its final pricing later this week and will settle by the end of the month. There is room for this to upsize further and a chance that the pricing could tighten a little more before close as we understand that demand for the notes has been high. We will update you when we have heard where the pricing is set.